Don't expect queues around the block to buy Clydesdale and Yorkshire banks

Dr Rob Webb

It came as no great surprise when David Thorburn announced earlier this week that he was stepping down as chief executive of the troubled Clydesdale Bank. He described it as “the right time”, and nobody disagreed. From a strictly professional point of view, there was precious little for him to stick around for. It’s no secret, after all, that National Australia Bank (NAB), the increasingly disenchanted owner of both Clydesdale and Yorkshire Bank, is desperate to exit the UK market.

What went wrong

Interestingly, there are wider lessons to be learnt – and not just for those in banking – from the story of the Australian bank that expanded into the UK. You may think it was just unlucky but so many acquisitions in so many industries end in the same way.

For NAB and its relationship with its UK subsidiaries the writing was on the wall since the onset of the financial crisis. As the Australian economy and banking sector sidestepped the major effects of the crisis, bank performance at NAB continued to grow; by contrast, the combination of a failing UK economy and a traditionally conservative banking strategy combined to derail performance at both Clydesdale and Yorkshire. What were once seen as efficiently run banks that had themselves evaded the worst of the crisis now began to drag down performance at head office. Shareholders began to twitch, and rumours of redundancies and sell off began to circulate as early as 2011.

As a result, the harsh business reality is that Thorburn, who oversaw a strategic review as a reaction to head office concerns, did what so many have done before: he began to cut costs by making redundancies and closing branches in a basic attempt to increase performance. As banking strategies open to CEOs in the UK converged and all took a similar path, at least he shouldered the burden of the tough decisions and played his part in increasing performance and readying the brand for sell-off.

As Clydesdale’s chairman put it in bidding him a typically fond farewell, Thorburn helped “identify the changes needed to deliver sustainable and satisfactory returns”. In other words, he took the unpleasant decisions that may yet render Clydesdale and Yorkshire vaguely attractive to would-be buyers and investors in the event of a seemingly inevitable flotation or sale. Job done; exit stage left.

Only yesterday . . .

Surveying this uncomfortable scene, it’s difficult to believe that as recently as four years ago NAB – which bought Clydesdale in 1987 and Yorkshire in 1990 – was regarded as a budding rival to the UK’s established High Street banking giants. It was seen in many quarters as a potential buyer of other branch networks and was heavily linked with a move for hundreds of Lloyds outlets. Now the inevitable and uncomfortable truth is that cultural differences and dichotomous economies mean it can hardly get out of Britain quickly enough – a story apparent in so many acquisitions.

The warning signs first appeared in early 2012, less than a year after Thorburn assumed office, when NAB noted that “difficult conditions have adversely affected the performance of UK banking”. Soon after – in an announcement that was infamously made during Australian working hours, when most of those who would lose their jobs were still asleep – a major restructuring was unveiled.

Confronted with mounting criticism, Clydesdale and Yorkshire set out to distance themselves from the disgraced ranks of “broken” banks. They had no wish to be lumped in with the likes of RBS and Northern Rock. And they had a point: no bailouts were needed. But the slide was under way.

More recently, the apparent conservative approach enacted by Clydesdale and Yorkshire also began to show cracks. Hefty charges to compensate victims of mis-sold Payment Protection Insurance added to the storm, as did a raft of costly IT problems. With this serving as extra drag on sluggish overall performance, NAB issued a profit warning and stepped up efforts to dispose of legacy issues and concentrate on its core domestic markets. Ever since, in business parlance, the focus has been on “consolidation”. So what happens now?

Sale prospects

Clydesdale and Yorkshire are said to be “in much better shape”. Everything is relative, of course, and “much better” isn’t the same as “good”; but there has unquestionably been an improvement. What Thorburn has achieved – or shouldered – through the difficult years of cost-cutting is to send the necessary signal to the market: “We’re ripe for purchase – difficult decisions undertaken.”

As a result, a flotation or a sale are now far more realistic prospects than they were two or three years ago, when no-one in their right mind would have touched these banks with the proverbial barge-pole. As NAB’s chief executive remarked last year in discussing the “absolute priority” of quitting the UK: “We think there’s an opportunity now that probably wasn’t there before.”

However, bank flotation’s have proved something of a mixed bag of late. TSB was able to spin off from Lloyds with next to no trouble. Virgin Money delayed its public listing in light of stock market volatility. Aldermore, a challenger bank specialising in catering for small businesses, scrapped its planned IPO altogether. It may be worth noting the emerging consensus that 2015 will be a year of some turbulence.

As far as a sale is concerned, the fact is that banking relies on a sort of natural oligopoly. We live in an age in which the importance of the branch has declined, staffing levels have plummeted, the internet has completely reshaped the landscape and complex instruments are increasingly used both to source funding and to manage risk; and yet the costs of entry remain high and the chances of success low.

This being the case, extraordinary shocks aside, the big players tend to dominate in perpetuity. Having more branches, being high up in the hierarchy and facing limited competition enables outflows and inflows to be calculated with more certainty. Large banks are thus assured that most of the money in circulation will be maintained among themselves. Fewer rivals, less risk, more loans generated, more economic growth: this is a process that more often than not has served Western economies well.

Despite the travails of the past few years, Clydesdale and Yorkshire are still comparatively solid brands. For all their problems, they are not and never have been viewed as genuinely “broken”. For a parent bank with a strong commitment to the UK, a parent bank whose shareholders don’t see a presence in Britain as an eternal thorn in their collective side, they may still hold some appeal.

Naturally, nascent hopes of a satisfactory denouement can’t disguise that the saga as a whole has been a predominantly sorry one – not just for the employees who have lost their jobs and the customers who have lost their faith but for the British banking industry and economy in general. Clydesdale and Yorkshire may yet bounce back in style, but it seems reasonable to suggest that when one of the world’s largest banks openly dreams of the day it can escape the UK – regardless of its reasons or motivations – optimism should be kept firmly in check.

There remains a lesson for every shareholder in this sad story: be generally wary of acquisitions and particularly wary of those proposed on a different continent.